Managerial accounting for managers 3e by noreen brewer and garrison

Applying Excel immediately precedes the Exercises in eleven of the twelve chapters in the book and is also integrated with McGraw-Hill Connect ® Accounting, allowing students to prac

Managerial Accounting for Managers

Brewer Garrison

ISBN 978-0-07-802542-6 MHID 0-07-802542-7

Edition

With Connect Plus® Accounting for Managerial Accounting for Managers, 3e you receive the most advanced study

tools as well as a fully integrated, media-rich E-book

What kind of study tools? You get things like

• Intelligent Response Technology Connect Accounting’s redesigned student interface for our end-of-chapter

assessment content that:

• Improves answer acceptance to reduce student frustration with formatting issues (such as rounding);

• Provides a general journal application that looks and feels more like what you would find in a general

ledger software package; and

• For select questions, provides an expanded table that guides students through the process of solving

the problem

• LearnSmart™ Adaptive learning system is designed to help students learn faster, study more efficiently, and retain

more knowledge for greater success

• Guided Examples Narrated and animated, step-by-step walkthroughs of algorithmic versions of assigned

exer-cises, allowing the student to identify and review or reinforcement on what you covered in class, Guided Examples

provide immediate feedback and focus on the areas where students need it the most

• Interactive Presentations teach each chapter’s core learning objectives and concepts through a multimedia

presentation, bringing the text content to life Interactive Presentations harness the full power of technology to truly

engage and appeal to all learning styles Ideal in all class formats—online, face to-face or hybrid

• Media-Rich E-book allows students to highlight, take notes, and bookmark important spots in the text, making

reviewing for quizzes and tests easier than ever

Connect Plus Accounting gives you a complete digital solution that allows you to access your course materials from any

computer, any time

Studying anytime, anywhere online has never been easier

If Connect Plus Accounting sounds good to you,

start a three-week FREE TRIAL today!

How?

Just ask your instructor for the course’s Connect Course URL At the course home page,

click the “Register Now” button, type in your e-mail address, and click “Start Free Trial.”

It’s that simple to begin using Connect Plus Accounting today.

The integrated solutions for Noreen’s Managerial Accounting

for Managers 3e have been proven to help you achieve your

course goals of improving student readiness, enhancing

student engagement, and increasing their comprehension of

content Known for its engaging style, the Noreen solution

employs the use of current companies, LearnSmart, and

instant feedback on practice problems to help students

engage with course materials, comprehend the content, and

achieve higher outcomes in the course

McGraw-Hill’s adaptive learning component, LearnSmart,

provides assignable modules that help students master core

concepts and come to class more prepared

In addition, Interactive Presentations deliver learning

objectives in an interactive environment, giving students

access to course-critical content anytime, anywhere

Finally, our new Intelligent Response Technology-based

content offers students an intelligent homework experience

that helps them stay focused on learning instead of

navigating the technology.

McGraw-Hill LearnSmart™

is an adaptive learning program that identifi es what an individual student knows and doesn’t know

LearnSmart’s adaptive learning path helps students learn faster, study more effi ciently, and retain more knowledge

Intelligent Response Technology (IRT)

is Connect Accounting’s new student interface for end-of-chapter assessment content Intelligent Response Technology provides a general journal application that looks and feels more like what you would fi nd in a general ledger software package, improves answer acceptance to reduce student frustration with formatting

issues (such as rounding), and, for select questions, provides an expanded table that guides students through the process of solving the problem

Connect Accounting’s Interactive

Presentations teach each chapter’s

core learning objectives and concepts through an engaging, hands-on presentation, bringing the text content to life Interactive Presentations harness the full power of technology to truly engage and appeal to all learning styles Interactive Presentations are ideal in all class formats—online, face-to-face, or hybrid.

The integrated solutions for Noreen’s Managerial Accounting

for Managers 3e have been proven to help you achieve your

course goals of improving student readiness, enhancing

student engagement, and increasing their comprehension of

content Known for its engaging style, the Noreen solution

employs the use of current companies, LearnSmart, and

instant feedback on practice problems to help students

engage with course materials, comprehend the content, and

achieve higher outcomes in the course

McGraw-Hill’s adaptive learning component, LearnSmart,

provides assignable modules that help students master core

concepts and come to class more prepared

In addition, Interactive Presentations deliver learning

objectives in an interactive environment, giving students

access to course-critical content anytime, anywhere

Finally, our new Intelligent Response Technology-based

content offers students an intelligent homework experience

that helps them stay focused on learning instead of

navigating the technology.

McGraw-Hill LearnSmart™

is an adaptive learning program that identifi es what an individual student knows and doesn’t know

LearnSmart’s adaptive learning path helps students learn faster, study more effi ciently, and retain more knowledge

Intelligent Response Technology (IRT)

is Connect Accounting’s new student interface for end-of-chapter assessment content Intelligent Response Technology provides a general journal application that looks and feels more like what you would fi nd in a general ledger software package, improves answer acceptance to reduce student frustration with formatting

issues (such as rounding), and, for select questions, provides an expanded table that guides students through the process of solving the problem

Connect Accounting’s Interactive

Presentations teach each chapter’s

core learning objectives and concepts through an engaging, hands-on presentation, bringing the text content to life Interactive Presentations harness the full power of technology to truly engage and appeal to all learning styles Interactive Presentations are ideal in all class formats—online, face-to-face, or hybrid.

Lecture Capture

eBooks

Connect Plus includes a

media-rich eBook that allows

you to share your notes with

your students Your students can

insert and review their own notes,

highlight the text, search for

specifi c information, and interact

with media resources Using an

eBook with Connect Plus gives your

students a complete digital solution

that allows them to access their

materials from any computer.

Make your classes available anytime, anywhere With simple, one-click recording, students can search for a word or phrase and be taken to the exact place in your lecture that they need to review

Lecture Capture

eBooks

Connect Plus includes a

media-rich eBook that allows

you to share your notes with

your students Your students can

insert and review their own notes,

highlight the text, search for

specifi c information, and interact

with media resources Using an

eBook with Connect Plus gives your

students a complete digital solution

that allows them to access their

materials from any computer.

Make your classes available anytime, anywhere With simple, one-click recording, students can search for a word or phrase and be taken to the exact place in your lecture that they need to review

Managerial Accounting for Managers

Managerial Accounting for Managers

T h i r d E d i t i o n

Eric W Noreen, Ph.D., CMA

Professor Emeritus University of Washington

Peter C Brewer, Ph.D., CPA

Miami University—Oxford, Ohio

Ray H Garrison, D.B.A., CPA

Professor Emeritus Brigham Young University

MANAGERIAL ACCOUNTING FOR MANAGERS

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue

of the Americas, New York, NY, 10020 Copyright © 2014 by The McGraw-Hill Companies, Inc All

rights reserved Printed in the United States of America Previous editions © 2011 and 2008 No part of

this publication may be reproduced or distributed in any form or by any means, or stored in a database or

retrieval system, without the prior written consent The McGraw-Hill Companies, Inc., including, but not

limited to, in any network or other of electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside

the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3

ISBN 978-0-07-802542-6

MHID 0-07-802542-7

Senior Vice President, Products & Markets: Kurt L Strand

Vice President, Content Production & Technology Services: Kimberly Meriwether David

Director: Tim Vertovec

Brand Manager: Donna M Dillon

Executive Director of Development: Ann Torbert

Development Editor II: Katie Jones

Director of Digital Content: Patricia Plumb

Digital Development Editor: Julie Hankins

Senior Marketing Manager: Michelle Heaster

Content Project Manager: Pat Frederickson

Senior Buyer: Carol A Bielski

Lead Designer: Matthew Baldwin

Cover Designer: Laurie Entringer

Cover Image: © Getty Images

Content Licensing Specialist: Joanne Mennemeier

Photo Researcher: Poyee Oster

Media Project Manager: Ron Nelms

Typeface: 10.5/12 Times Roman

Compositor: Laserwords Private Limited

ISBN 978-0-07-802542-6 (alk paper) — ISBN 0-07-802542-7 (alk paper)

1 Managerial accounting I Brewer, Peter C II Garrison, Ray H III Title

HF5657.4.N668 2014

658.15’11 dc23

2012034089

The Internet addresses listed in the text were accurate at the time of publication The inclusion of a

website does not indicate an endorsement by the authors or McGraw-Hill, and McGraw-Hill does not

guarantee the accuracy of the information presented at these sites.

www.mhhe.com

Dedication

To our families and to our many colleagues who use this book

— Eric W Noreen , Peter C Brewer ,

and Ray H Garrison

About the Authors

Eric W Noreen has held ments at institutions in the United States, Europe, and Asia He is emer-itus professor of accounting at the University of Washington

His BA degree is from the versity of Washington and his MBA and PhD degrees are from Stanford University A Certified Management Accountant, he was awarded a Cer-tificate of Distinguished Performance

Uni-by the Institute of Certified Management Accountants

Professor Noreen has served as associate editor of The

jour-nals including: the Journal of Accounting Research; The

Accounting Review; the Journal of Accounting and

Econom-ics; Accounting Horizons; Accounting, Organizations and

Society; Contemporary Accounting Research; the Journal

of Management Accounting Research; and the Review of

Accounting Studies

Professor Noreen has won a number of awards from

stu-dents for his teaching ■

Ray H Garrison is emeritus fessor of accounting at Brigham Young University, Provo, Utah He received his BS and MS degrees from Brigham Young University and his DBA degree from Indiana University

As a certified public accountant, Professor Garrison has been involved

in management consulting work with both national and regional account-ing firms He has published articles in

The Accounting Review, Management Accounting, and other

professional journals Innovation in the classroom has earned

Professor Garrison the Karl G Maeser Distinguished

Teach-ing Award from Brigham Young University ■

Peter C Brewer is a professor in the Department of Accountancy at Miami University, Oxford, Ohio He holds a BS degree in accounting from Penn State University, an MS degree

in accounting from the University of Virginia, and a PhD from the Univer-sity of Tennessee He has published more than 35 articles in a variety

of journals including: Management Accounting Research; the Journal of Information Systems; Cost Management; Strategic Finance;

the Journal of Accountancy; Issues in Accounting

Educa-tion; and the Journal of Business Logistics

Professor Brewer is a member of the editorial board

of the Journal of Accounting Education and has served on the editorial board of Issues in Accounting Education His

article “Putting Strategy into the Balanced Scorecard” won the 2003 International Federation of Accountants’ Articles

of Merit competition and his articles “Using Six Sigma

to Improve the Finance Function” and “Lean Accounting:

What’s It All About?” were awarded the Institute of agement Accountants’ Lybrand Gold and Silver Medals in

Man-2005 and 2006 He has received Miami University’s Richard

T Farmer School of Business Teaching Excellence Award and has been recognized on two occasions by the Miami University Associated Student Government for “making a remarkable commitment to students and their educational development.” He is a leading thinker in undergraduate man-agement accounting curriculum innovation and is a frequent presenter at various professional and academic conferences

Prior to joining the faculty at Miami University, sor Brewer was employed as an auditor for Touche Ross in the firm’s Philadelphia office He also worked as an internal audit manager for the Board of Pensions of the Presbyterian Church (U.S.A.) ■

Focus on the

with Noreen/Brewer/Garrison

crafted a streamlined managerial accounting book that is perfect for accounting majors who intend to move into managerial positions The traditional Process Costing, Statement of Cash Flows, and Financial Statement Analysis chapters have been dropped to enable instructors

accounting —planning, control, and decision making Noreen/Brewer/

Garrison focuses on the fundamentals, allowing students to develop the conceptual framework managers need to succeed.

In its third edition, Managerial Accounting for Managers continues to

adhere to three core standards:

FOCUS Noreen/Brewer/Garrison pinpoints the key managerial concepts students will need in their future careers With no journal entries or financial accounting topics to worry about, students can focus

on the fundamental principles of managerial accounting

RELEVANCE With its insightful Business Focus vignettes that begin each chapter, current In Business examples throughout the text, and tried-and-true end-of-chapter material, students will always see the real-world applicability of Noreen/Brewer/Garrison.

Noreen/Brewer/Garrison covers a variety of business models, including nonprofit, retail, service, wholesale, and manufacturing organizations

Service company examples are highlighted with icons in the margins of the text

“It’s a very clear book with a healthy focus on decision making and service businesses Great for non-majors.”

— Mark Holtzman , Seton Hall University

“Very well-written and compatible with

a user-based approach.”

— Kay Poston , University

of Indianapolis

“The best introductory management accounting book I have used It is complete, concise, and written at a level beginning students can understand.”

— Christine Haynes , University of West Georgia

Managerial Accounting for Managers is full of pedagogy designed

to make studying productive and hassle-free

Opening Vignette

Each chapter opens with a Business Focus feature that provides a

real-world example for students, allowing them to see how the chapter’s information

and insights apply to the world outside the classroom Learning Objectives

alert students to what they should expect as they progress through the chapter.

“Many concepts in accounting are rather abstract if not given some type of context to understand them in The business focus features help to provide this context and can lead to discussions in class if the instructor wishes.”

— Jeffrey Wong, University of Nevada, Reno

Applying Excel

NEW to the third edition of Noreen!

This NEW and exciting end-of-chapter feature links the power of

Excel with managerial accounting concepts by illustrating

how Excel functionality can be used to better understand accounting data Applying Excel goes beyond plugging numbers into a template by providing students with an opportunity to build their own Excel worksheets and formulas Students are then asked “what if” questions

in which they analyze not only how related pieces of accounting data affect each other but why they do Applying Excel immediately precedes

the Exercises in eleven of the twelve chapters in the book and is also

integrated with McGraw-Hill Connect ® Accounting, allowing

students to practice their skills online with algorithmically generated datasets and to watch animated, narrated tutorials on how to use formulas in Excel.

“An excellent pedagogical feature that

helps further reinforce students’

knowledge of key concepts in the text

book, while strengthening students’

Excel skills that are so important in

the work place.”

— Marianne L James , California State

University, Los Angeles

“ [Applying Excel is] an excellent way for students to programmatically develop spreadsheet skills without having

to be taught spreadsheet techniques by the instructor A significant associated benefit is that students gain more exposure to the dynamics of accounting information by

working with what-if scenarios.”

— Earl Godfrey , Gardner–Webb University

21

In 1986, Women’s World of Fitness went rupt despite having 14 locations and 50,000 members The company’s owner, Gary Heavin, says the fitness centers contained too many costly amenities such as swimming pools, tan- ning beds, cardio machines, kid’s programs, clas ses As costs escalated, he attempted to men, which alienated his female members

bank-What did Heavin learn from his experience?

In 1992, Heavin founded a new brand of women’s fitness centers called Curves Rather than investing in every conceivable piece

of fitness equipment and amenity, Heavin focused on simplicity He created a simple

fitness circuit that uses minimal equipment and is quick and easy for members to

com-plete Instead of operating almost 24 hours a day, he decided to close his gyms early

that did not provide benefits in the eyes of his customers With dramatically lower costs,

he has been able to maintain his “women only” approach while building a billion dollar

company with nearly 10,000 locations worldwide ■

Source: Alison Stein Wellner, “Gary Heavin Is on a Mission from God,” Inc magazine, October 2006,

Understanding Costs Aids the Growth of a

Billion Dollar Company

LO 2–2 Distinguish between product cost and period costs and give examples of each

LO 2–3 Understand cost behavior costs, fixed costs, and mixed costs

LO 2–4 Analyze a mixed cost using high-low method

LO 2–5 Prepare income statements for a merchandising company using the traditional and contribution formats

LO 2–6 Understand the differences costs

LO 2–7 Understand cost classifications used in making decisions:

differential costs, opportunity costs, and sunk costs

LO 2–8 (Appendix 2A) Analyze a mixed cost using a scattergraph regression method.

nor25427_ch02_021-069.indd 21 24/08/12 12:57 PM

In Business Boxes

These helpful boxed features offer a glimpse

into how real companies use the managerial

accounting concepts discussed within the

chapter Each chapter contains from three to

fourteen of these current examples.

Managerial Accounting in

Action Vignettes

These vignettes depict cross-functional

teams working together in real-life

settings, working with the products and

services that students recognize from

their own lives Students are shown

step-by-step how accounting concepts

are implemented in organizations and

how these concepts are applied to solve

everyday business problems First, “The

Issue” is introduced through a dialogue;

the student then walks through the

implementation process; finally, “The

Wrap-up” summarizes the big picture.

“I love these Again, a connection to the real world that adds credence to the course.”

— Larry N Bitner, Shippensburg University

“This element is exceptional The situations truly reflect real life issues business people would face—not just “textbook” manufactured examples that always have black-and-white answers.”

— Ann E Selk, University of Wisconsin–Green Bay

I N B U S I N E S S

THE CHALLENGES OF MANAGING CHARITABLE ORGANIZATIONS

Charitable organizations, such as Harlem Children’s Zone , Sports4Kids , and Citizen Schools , are facing a difficult situation Many donors—aware of stories involving charities that spent exces- sively on themselves while losing sight of their mission—have started prohibiting their charity of charitable organizations find it difficult to expand without making additions to their infrastructure

costs from 5.6% to 14.7% of its total budget The organization claims that this cost increase was scale of operations.

Many charitable organizations are starting to seek gifts explicitly to fund administrative expenses Their argument is simple—they cannot do good deeds for other people without incurring such costs.

Source: Rachel Emma Silverman and Sally Beatty, “Save the Children (But Pay the Bills, Too),” The Wall Street Journal, December 26, 2006, pp D1–D2.

Job-Order Costing—An Example

To introduce job-order costing, we will follow a specific job as it progresses through the manufacturing process This job consists of two experimental couplings that Yost Preci- sion Machining has agreed to produce for Loops Unlimited, a manufacturer of roller

in the performance and safety of the ride Before we begin our discussion, recall from a categories: (1) direct materials, (2) direct labor, and (3) manufacturing overhead As we study the operation of a job-order costing system, we will see how each of these three types of costs is recorded and accumulated

Yost Precision Machining is a small company in Michigan that specializes in sea exploration vehicles to the inertial triggers in automobile air bags The company’s top managers gather every morning at 8:00 a.m in the company’s conference room for the daily planning meeting Attending the meeting this morning are: Jean Yost, the com- pany’s president; David Cheung, the marketing manager; Debbie Turner, the production manager; and Marc White, the company controller The president opened the meeting:

Jean: The production schedule indicates we’ll be starting Job 2B47 today Isn’t that the

special order for experimental couplings, David?

David: That’s right That’s the order from Loops Unlimited for two couplings for their

new roller coaster ride for Magic Mountain

Debbie: Why only two couplings? Don’t they need a coupling for every car?

David: Yes But this is a completely new roller coaster The cars will go faster and will

be subjected to more twists, turns, drops, and loops than on any other existing roller coaster To hold up under these stresses, Loops Unlimited’s engineers completely redesigned the cars and couplings They want us to make just two of these new

MANAGERIAL ACCOUNTING IN ACTION

The Issue

End-of-Chapter Material

Building on Garrison/Noreen/Brewer’s reputation for having the best end-of-chapter review and discussion material of any text on the market, Noreen’s problem and case material continues to conform to AACSB recommendations and makes a great starting point for class discussions and group projects.

In this edition, the authors have added a NEW

end-of-chapter feature called Applying Excel Applying Excel integrates key course concepts and Excel—a software students will encounter in the workplace, whether they go into accounting or any other business major With Applying Excel, students not only gain practice working with Excel software, they also learn how Excel can be used to present accounting data and how that data is interrelated For more information on this exciting new feature, please see page viii

Applying Excel

The Excel worksheet form that appears on the next page is to be used to recreate Exhibit 2–12

on page 39 Download the workbook containing this form from the Online Learning Center at

www.mhhe.com/noreen3e On the website you will also receive instructions about how to use this

worksheet form

LEARNING OBJECTIVE 2–5

accounting Available with McGraw-Hill’s Connect™ Accounting.

EXERCISE 2–1 Classifying Manufacturing Costs [ LO 2–1 ]

Your Boat, Inc., assembles custom sailboats from components supplied by various manufacturers

The company is very small and its assembly shop and retail sales store are housed in a Gig Harbor, Washington, boathouse Below are listed some of the costs that are incurred at the company

Required:

Exercises accounting All applicable exercises are available with McGraw-Hill’s Connect™ Accounting.

PROBLEM 2–14 Contribution Format versus Traditional Income Statement [ LO 2–5 ]

House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the retail

level The organs sell, on the average, for $2,500 each The average cost of an organ from the

manu-facturer is $1,500 The costs that the company incurs in a typical month are presented below:

Problems

accounting

All applicable problems are available with McGraw-Hill’s Connect™ Accounting.

CASE 2–25 Scattergraph Analysis; Selection of an Activity Base [ LO 2–4 ]

Mapleleaf Sweepers of Toronto manufactures replacement rotary sweeper brooms for the large sweeper trucks that clear leaves and snow from city streets The business is seasonal, with the largest demand during and just preceding the fall and winter months Because there are so many different kinds of sweeper brooms used by its customers, Mapleleaf Sweepers makes all of its

Cases All applicable cases are available with McGraw-Hill’s Connect™ Accounting.

— Terence Pitre , University of St Thomas

Author-Written Supplements

Unlike other managerial accounting texts, the book’s authors write all of the major supplements, ensuring a perfect fit between text and supplements For more

Managers’ supplements package, see page xviii

• Instructor’s Resource Guide

• Test Bank

• Solutions Manual

• Workbook/Study Guide

“I strongly recommend this book

to colleagues [for the]

introductory course in managerial accounting It fits students without a background in managerial accounting It is the best textbook in managerial

accounting.”

— Yousef Jahmani , Savannah State

University

“Excellent, comprehensive book

Easy for students to read and

understand.”

— Sandy Copa , North Hennepin College

“Students can easily understand the book [Noreen] covers all the pertinent topics needed in Managerial Accounting in a concise, easy to understand

format.”

— Linda Malgeri , Kennesaw State

University

Utilizing the Icons

To reflect our service-based economy, the text is replete with examples from service-based businesses A helpful icon distinguishes service-related examples in the text

Ethics assignments and examples serve

as a reminder that good conduct is vital

in business Icons call out content that relates to ethical behavior for students

The writing icon denotes problems that require students to use critical thinking

as well as writing skills to explain their decisions

An Excel © icon alerts students that spreadsheet templates are available for use with select problems and cases

The IFRS icon highlights content that may be affected by the impending change to IFRS and possible convergence between U.S GAAP and IFRS

New to the

Third Edition

suggestions the authors have made the following changes:

A NEW Applying Excel feature has been added to Chapters 2–12 Applying Excel gives students the opportunity to

practice using Excel formulas to build their own worksheets They are then asked a series of “what if” questions, all of which

illustrate the relationship among various pieces of accounting data The Applying Excel feature links directly to the concepts

introduced in the chapter, providing students with an invaluable opportunity to apply what they have learned using a software

they will use throughout their careers, whether they become accountants or not, and is integrated into Connect Accounting

The Differential Analysis and Capital Budgeting chapters have been moved up to Chapters 7 and 8, in order to put a stronger

emphasis on decision making, a critical skill for managers.

The In Business boxes have been updated throughout to provide relevant and updated real-world examples for use in

classroom discussion and to support student understanding of key concepts as they read through the chapter

The end-of-chapter practice material has been updated throughout

Chapter 1

This introductory chapter has been completely

overhauled to help all business students better

understand why managerial accounting is relevant to

their future careers

Chapter 2

This chapter has been extensively rewritten to include

coverage of mixed costs and contribution format

income statements The redundant coverage of the

schedule of cost of goods manufactured has been

eliminated so that it is now only covered in Chapter 3

The comparison of financial and managerial accounting

has been moved to Chapter 1

Chapter 4

This chapter has added a cost formula approach to

computing predetermined overhead rates A new

learning objective related to computing job costs was

added An exhibit that provides a conceptual overview

of manufacturing cost flows has been moved to this

chapter from Chapter 2

Chapter 5

The segmented income statements have been moved

to this chapter The coverage of variable and absorption costing has been extensively reorganized to improve the flow of discussion

Chapter 12

This chapter has been reorganized, moving the segmented statements to an earlier chapter and adding nonfinancial performance measures to the chapter

McGraw-Hill Connect ® Accounting

McGraw-Hill Connect Accounting is an online assignment and assessment solution that connects you with the

tools and resources necessary to achieve success through faster learning, more efficient studying, and higher tion of knowledge

Online Assignments

McGraw-Hill Connect Accounting helps students learn more efficiently by providing

feed-back and practice material when and where they need it Connect Accounting grades

homework automatically and students benefit from the immediate feedback that they receive, particularly on any questions they may have missed Furthermore, algorithmic questions provide students with unlimited opportunities for practice

Intelligent Response Technology (IRT)

IRT is a redesigned student interface for our end-of-chapter assessment content The benefits include improved answer acceptance to reduce students’ frustration with formatting issues (such as rounding), expanded tables that look and feel more like what you would find in an accounting software package, and select questions redesigned to test students’ knowledge more fully

LearnSmart

LearnSmart, adaptive self-study technology within Connect Accounting, ensures your

stu-dents are learning faster, studying more efficiently, and retaining more knowledge by pointing the concepts that each individual student does not understand and mapping out a personalized study plan for his or her success Based on students’ self- diagnoses of their proficiency, LearnSmart intelligently delivers a series of adaptive questions, providing stu-dents with a personalized one-on-one tutor experience

NEW Interactive Presentations

Interactive Presentations, assignable by individual learning objective within Connect Accounting, teach the core concepts of the text in an animated, narrated, and interactive mul-

timedia format, bringing the key concepts of the course to life—particularly helpful for online courses and for those audio and visual learners who struggle reading the textbook page by page

NEW Guided Examples

Guided Examples, available as hints within Connect Accounting when enabled by the

instruc-tor , provide a narrated, animated, step-by-step walkthrough of select exercises similar to those assigned These short presentations provide reinforcement when students need it most

Student Resource Library

The Connect Accounting Student Library gives students access to additional resources

such as recorded lectures, online practice materials, an eBook, and more

A Market-Leading Book Deserves

Market-Leading Technology

Less Managing More Teaching Greater Learning

McGraw-Hill Connect Accounting offers a number of powerful tools and features to make managing assignments easier, so faculty can spend more time teaching With Connect Accounting, students can engage with their course-

work anytime, anywhere, making the learning process more accessible and efficient Please see the previous page for

a description of the student tools available within Connect Accounting

McGraw-Hill Connect ® Accounting for Instructors Simple Assignment Management and Smart Grading With McGraw-Hill Connect Accounting, creating

assignments is easier than ever, so you can spend more time teaching and less time managing Connect Accounting

enables you to:

• Create and deliver assignments and assessments easily with selectable static and algorithmic end-of-chapter tions and test bank items

• Go paperless with online submission and grading of student assignments and by sharing notes through the rich eBook

• Have assignments scored automatically, giving students immediate feedback on their work and comparisons with correct answers and explanations

• Reinforce classroom concepts by assigning Guided Examples, LearnSmart modules, and Interactive Presentations

Instructor Library

The Connect Accounting Instructor Library is your repository for additional resources to

improve student engagement in and out of class You can select and use any asset that

enhances your lecture The Connect Accounting Instructor Library includes access to the

textbook’s: Solutions Manual , Test Bank , Instructor PowerPoint ® Slides , Instructor’s Resource Guide , Excel Template Solutions , Applying Excel Solutions , Sample Syllabus , Media-rich eBook

Student Reports

McGraw-Hill Connect Accounting keeps instructors informed about how each student,

sec-tion, and class is performing, allowing for more productive use of lecture and office hours

The Reports tab enables you to view scored work immediately and track individual or group performance with assignment and grade reports, access an instant view of student or class performance relative to learning objectives, and collect data and generate reports required by many accreditation organizations, such as AACSB and AICPA

McGraw-Hill Connect ® Plus Accounting

McGraw-Hill reinvents the textbook learning experience for the modern student with Connect

Plus Accounting, which provides a seamless integration of the eBook and Connect ing Connect Plus Accounting provides all of the Connect Accounting features, as well as:

• An integrated eBook, allowing for anytime, anywhere access to the textbook

• Dynamic links between the problems or questions you assign to your students and the tion in the eBook where the concept related to that problem or question is covered

• A powerful search function to pinpoint and connect key concepts in a snap

• Highlighting, note-taking and sharing, and other media-rich capabilities

For more information about Connect Accounting, go to www.mcgrawhillconnect.com , or contact your local McGraw-Hill sales representative

Tegrity Campus: Lectures 24/7

Tegrity Campus, a new McGraw-Hill company, provides a service that makes class time available 24/7 by automatically capturing every lecture With a simple one-click start-and-stop process, you capture all computer screens and corresponding audio in a format that is easily search-able, frame by frame Students can replay any part of any class with easy-to-use browser-based viewing on a PC

or Mac, an iPod, or other mobile device

Educators know that the more students can see, hear, and experience class resources, the better they learn

In fact, studies prove it Tegrity Campus’s unique search feature helps students efficiently find what they need, when they need it, across an entire semester of class recordings Help turn your students’ study time into learning moments immediately supported by your lecture With Tegrity Campus, you also increase intent listening and class participation by easing students’ concerns about note-taking Lecture Capture will make it more likely you will see students’ faces, not the tops of their heads

To learn more about Tegrity, watch a 2-minute Flash demo at http://tegritycampus.mhhe.com

McGraw-Hill Campus ™

McGraw-Hill Campus ™ is a new one-stop teaching and learning experience available to users of any learning management system This institutional service allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill Higher Education materi-

als, including the award winning McGraw-Hill Connect ® platform, from directly within the institution’s website McGraw-Hill Campus provides faculty with instant access to all McGraw-Hill Higher Education teaching materials (e.g., eTextbooks, test banks, PowerPoint slides, animations and learning objects), allowing them

to browse, search, and use any instructor ancillary content in our vast library Students enjoy SSO access to a variety of free (e.g., quizzes, flash cards, narrated presentations) and subscription based products (e.g., McGraw-Hill

Connect ) With McGraw-Hill Campus, faculty and students will never need to create another account to access

McGraw-Hill products and services

McGraw-Hill Customer Experience

At McGraw-Hill, we understand that getting the most from new technology can be challenging That’s why our services don’t stop after you purchase our book You can email our product specialists 24 hours a day, get product training online, or search our knowledge bank of Frequently Asked Questions on our support Website For Customer experience, call 800-331-5094 or visit www.mhhe.com/support One of our Technical Support Analysts will

assist you in a timely fashion You also can take advantage of the new “Contact Publisher” link within Connect

Accounting

McGraw-Hill Create ™

Your course evolves over time Shouldn’t your course material? Customize your own quality, well-designed, full-color textbook in print or eBook format in a few simple steps at

remove content to match better the way you teach your course You even can add your own material, such as a syllabus or handout Personalize your book’s appearance by selecting the cover and adding your name, school, and

course information Order a Create book and you’ll receive a complimentary print review copy in 3-5 business days

or a complimentary electronic review copy (eComp) via email in about one hour

Assurance of Learning Ready

Many educational institutions today are focused on the notion of

assurance of learning, an important element of some accreditation

standards Managerial Accounting for Managers, 3e, is designed

specifically to support your assurance of learning initiatives with a

simple, yet powerful, solution

Each test bank question for Managerial Accounting for Managers,

3e maps to a specific chapter learning outcome/-objective listed in

the text You can use our test bank software, EZ Test, and Connect

to easily query for learning outcomes/objectives that directly relate to

the learning objectives for your course You can then use the reporting

features of EZ Test and Connect to aggregate student results in

similar fashion, making the collection and presentation of assurance

of learning data simple and easy

AACSB Statement

The McGraw-Hill Companies, Inc., is a proud corporate member of

AACSB International Recognizing the importance and value of

AACSB accreditation, we have sought to recognize the curricula

guidelines detailed in AACSB standards for business accreditation

by connecting selected questions in Noreen 3e, with the general

knowledge and skill guidelines found in the AACSB standards The

statements contained in Noreen 3e are provided only as a guide for

the users of this text The AACSB leaves content coverage and

assessment clearly within the realm and control of individual

schools, the mission of the school, and the faculty The AACSB does

also charge schools with the obligation of doing assessment against

their own content and learning goals While Noreen 3e and its

teaching package make no claim of any specific AACSB qualification

or evaluation, we have labeled selected questions according to the

six general knowledge and skills areas The labels or tags within

Noreen 3e are as indicated There are, of course, many more within

the test bank, the text, and the teaching package which might be

used as a “standard” for your course However, the labeled questions

are suggested for your consideration

McGraw-Hill Connect Accounting offers a

number of powerful tools and features to make managing your classroom easier Connect Accounting with Noreen 3e offers enhanced features and technology

to help both you and your students make the most of your time

inside and outside the classroom See page xiv for more details

Online Learning Center ( www.mhhe.com/noreen3e )

The password-protected instructor side of the book’s Online Learning Center (OLC) houses all the instructor resources you need to administer your course, including:

• Suggested Cases

• Solutions Manual with suggested course outlines

• Test Bank

• Instructor’s Resource Guide

• Instructor PowerPoint slides

• Excel Template Solutions

• Applying Excel Solutions

• Sample Syllabus

If you choose to use Connect Accounting with Noreen 3e, you will

have access to these same resources via the Instructor Library

Instructor CD-ROM

MHID 0077432355 ISBN 978007743235 Allowing instructors to create a customized multimedia presentation, this all-in-one resource incorporates the Test Bank, Instructor PowerPoint slides, Instructor’s Resource Guide, and Solutions Manual

Instructor’s Resource Guide

Available on the password-protected Instructor OLC and Instructor’s

Resource CD, and within the Connect Instructor Library

This supplement contains the teaching transparency masters, PowerPoint slides, and extensive chapter-by-chapter lecture notes to help with classroom presentation It contains useful suggestions for presenting key concepts and ideas

This manual is coordinated with the PowerPoint slides, making lesson planning even easier

Solutions Manual

Available on the Instructor’s CD, Instructor’s OLC, and within the

Connect Instructor Library

This supplement contains completely worked-out solutions to all assignment material In addition, the manual contains suggested course outlines and a listing of exercises, problems, and cases scaled according to difficulty and estimated time for completion Solutions

to the NEW Applying Excel feature is housed here and includes the completed Excel forms

McGraw-Hill Connect ® Accounting

McGraw-Hill Connect Accounting helps

prepare you for your future by enabling faster learning, more efficient studying, and higher retention of knowledge See page xiv for more details

CourseSmart is a new way to find and buy eTextbooks At

CourseSmart you can save up to 45 percent off the cost of a print

textbook, reduce your impact on the environment, and gain access

to powerful Web tools for learning CourseSmart has the largest

selection of eTextbooks available anywhere, offering thousands of

the most commonly adopted textbooks from a wide variety of higher

education publishers CourseSmart eTextbooks are available in one

standard online reader with full text search, notes and highlighting,

and email tools for sharing notes between classmates

Online Learning Center

The Online Learning Center (OLC) follows Managerial Accounting

for Managers chapter by chapter, offering all kinds of

supplementary help for you as you read

The OLC includes the following resources to help you study more

• Student PowerPoint Slides

• Narrated PowerPoint Lectures

• Excel Templates

• Check Figures

If your instructor chooses to use Connect Accounting in this

course, you will have access to these same resources via the Student Library

Applying Excel

Forms available on the OLC and in the Connect Student Library

This NEW and exciting feature has been added to Chapters 2–12 of the text Applying Excel gives you the opportunity to build your own Excel worksheet using Excel formulas You are then asked to answer

“what if” questions, all of which illustrate the relationship among various pieces of accounting data The Applying Excel feature links directly to the concepts introduced in the chapter, providing you with an invaluable opportunity to apply what you have learned utilizing an application you will use throughout your career

Workbook/Study Guide

MHID: 0077432371 ISBN-13: 9780077432379 This printed study aid provides suggestions for studying chapter material, summarizes essential points in each chapter, and tests your knowledge using self-test questions and exercises

Acknowledgments

S uggestions have been received from many of our colleagues

through-out the world Each of those who have offered comments and suggestions has our thanks

The efforts of many people are needed to develop and improve a text

Among these people are the reviewers and consultants who point out areas of concern, cite areas of strength, and make recommendations for change In this regard, the follow-ing professors provided feedback that was enormously helpful in preparing the third edi-

tion of Managerial Accounting for Managers:

Third Edition Reviewers

Wagdy Abdallah, Seton Hall University Rick Andrews, Sinclair Community College Jane Austin, Oklahoma City University Linda Benz, Jefferson Technical College Jennifer Cainas, University of South Florida Dana Carpenter, MATC Truax

Chiaho Chang, Montlcair State University Sandy Copa, North Hennepin Community

College

Ron Lazer, University of Houston Candace Leuck, Clemson University Linda Malgeri, Kennesaw State University Steve Markoff, Montclair State University Melissa Martin, Arizona State

Dennis Mullen, City College of San Francisco

Michael Newman, University of

Houston–Houston

JoAnn Pinto, Montclair State University Terence Pitre, University of St Thomas Shirley Polejewski, University of St Thomas Kay Poston, University of Indianapolis Therese Rice, North Hennepin Community

College

Rex Schildhouse, Miramar College Daniel Sevall, Lincoln University Ken Snow, Florida State College–Jacksonville Dorothy Thompson, North Central Texas

Florida

James Yang, Montclair State University Marjorie Yuschak, Rutgers University Ronald Zhao, Monmouth University

Previous Edition Reviewers:

Linda Abernathy, Kirkwood Community

Carolina–Charlotte

Larry N Bitner, Shippensburg University Jorja Bradford, Alabama State University Janet Butler, Texas State University-San

Darlene Coarts, University of Northern Iowa Elizabeth Connors, University of

J Marie Gibson, University of Nevada Reno Olen Greer, Missouri State University Richard O Hanson, Southern New Hampshire

Randy Johnston, Michigan State University Nancy Jones, California State University Carl Keller, Indiana Purdue University/Fort

Shirley Polejewski, University of St Thomas Kamala Raghavan, Robert Morris University Raul Ramos, Lorain County Community

College

John Reisch, East Carolina University Michelle Reisch, East Carolina University Luther L Ross, Sr., Central Piedmont

Community College

Pamela Rouse, Butler University Amy Santos, Manatee Community College Ann E Selk, University of Wisconsin–

Green Bay

Vic Stanton, University of California–Berkeley Ellen Sweatt, Georgia Perimeter College Rick Tabor, Auburn University

Diane Tanner, University of North Florida Samantha Ternes, Kirkwood Community

Marjorie E Yuschak, Rutgers University

We are grateful for the outstanding support from McGraw-Hill In particular, we would like to thank Tim Vertovec, Director; Donna Dillon, Brand Manager; Katie Jones, Devel-opment Editor; Pat Frederickson, Content Project Manager; Carol Bielski, Buyer; Matt Baldwin, Designer; and Joanne Mennemeier, Photo Research Coordinator

Thank you to the following individuals who helped prepare the supplements: Jon

A Booker and Charles W Caldwell of Tennessee Technological University, Cynthia J

Rooney of the University of New Mexico, and Susan C Galbreath of Lipscomb sity for crafting the Instructor and Student PowerPoint Slides; Ilene Persoff of CW Post Campus/Long Island University for updating the Quizzes and Exams; and Jack Terry of ComSource Associates, Inc., for creating the Excel templates

Thank you to our Digital Contributor, Margaret Shackell-Dowell (Cornell

Uni-versity), for her many contributions to Connect Accounting for Noreen 3e, including

Guided Example content, Interactive Presentation review, accuracy checking, and for her efforts as lead subject matter expert on Intelligent Response Technology Thanks also to Jeannie Folk (College of DuPage) for her reviews of Interactive Presentations and Guided

Examples, and Patti Lopez (Valencia College) for her efforts as lead subject matter expert

on LearnSmart, and accuracy checker on Connect Accounting, and Donald Campbell (Brigham Young University-Idaho) for Connect Accounting accuracy checking Finally,

we would like to thank Ilene Persoff and Helen Roybark for working so hard to ensure an error-free third edition

We are grateful to the Institute of Certified Management Accountants for sion to use questions and/or unofficial answers from past Certificate in Management Accounting (CMA) examinations Likewise, we thank the American Institute of Certified Public Accountants, the Society of Management Accountants of Canada, and the Char-tered Institute of Management Accountants (United Kingdom) for permission to use (or

permis-to adapt) selected problems from their examinations These problems bear the notations CPA, SMA, and CIMA respectively

Eric W Noreen • Peter C Brewer • Ray H Garrison

Photo Credits 583Index 585

Brief Contents

Why Does Managerial Accounting Matter to Your Career? 5

Business Majors 5Accounting Majors 7

Professional Certification—A Smart Investment 7

What Skills Do Managers Need to Succeed? 8

Strategic Management Skills 8Enterprise Risk Management Skills 9Process Management Skills 11

Lean Production 11 The Theory of Constraints (TOC) 12

Measurement Skills 13Leadership Skills 13

The Importance of Ethics in Business 14

Code of Conduct for Management Accountants 15

Corporate Social Responsibility 17

Summary 19 Glossary 19 Questions 19

1

C h a p t e r

Managerial Accounting and Cost Concepts 21

General Cost Classifications 22

Manufacturing Costs 22

Direct Materials 22 Direct Labor 22

Cost Classifications for Predicting Cost Behavior 25

Variable Cost 26Fixed Cost 27The Linearity Assumption and the Relevant Range 28

Mixed Costs 30

The Analysis of Mixed Costs 31

Diagnosing Cost Behavior with a Scattergraph Plot 32

The High-Low Method 35The Least-Squares Regression Method 37

Traditional and Contribution Format Income Statements 39

The Traditional Format Income Statement 39The Contribution Format Income Statement 40

Cost Classifications for Assigning Costs to Cost Objects 40

Direct Cost 41Indirect Cost 41

Cost Classifications for Decision Making 41

Differential Cost and Revenue 41Opportunity Cost 42

Sunk Cost 43

Summary 44 Review Problem 1: Cost Terms 44 Review Problem 2: High-Low Method 45 Glossary 46

Questions 48 Applying Excel 48

4 3

CVP Relationships in Equation Form 74

CVP Relationships in Graphic Form 75

Preparing the CVP Graph 75

Contribution Margin Ratio (CM Ratio) 77

Some Applications of CVP Concepts 79

Change in Fixed Cost and Sales Volume 79

Change in Variable Costs and Sales Volume 80

Change in Fixed Cost, Sales Price, and Sales

Volume 81

Change in Variable Cost, Fixed Cost, and Sales

Volume 82

Change in Selling Price 82

Target Profit and Break-Even Analysis 83

Target Profit Analysis 83

The Equation Method 83

The Formula Method 84

Target Profit Analysis in Terms of Sales Dollars 84

Break-Even Analysis 85

Break-Even in Unit Sales 85

Break-Even in Sales Dollars 85

The Margin of Safety 86

CVP Considerations in Choosing a Cost Structure 87

Cost Structure and Profit Stability 87

Operating Leverage 88

Structuring Sales Commissions 90

Sales Mix 91

The Definition of Sales Mix 91

Sales Mix and Break-Even Analysis 91

Assumptions of CVP Analysis 93

Summary 94

Review Problem: CVP Relationships 94

Glossary 97 Questions 97 Applying Excel 98 Exercises 99 Problems 105 Cases 113

Job-Order Costing—The Flow of Costs 126

Direct and Indirect Materials 127Labor Cost 128

Manufacturing Overhead Cost 129Applying Manufacturing Overhead 129

Underapplied or Overapplied Overhead 130

Disposition of Underapplied or Overapplied Overhead 131

Prepare an Income Statement 132

Cost of Goods Sold 132

The Direct Method of Determining Cost of Goods Sold 132

The Indirect Method of Determining Cost of Goods Sold 133

Income Statement 134Multiple Predetermined Overhead Rates 135

Job-Order Costing in Service Companies 135

Summary 135 Review Problem: Job-Order Costing 136 Glossary 137

5

Questions 138 Applying Excel 139 Exercises 140 Problems 145 Cases 150

Appendix 4A: The Predetermined Overhead Rate and Capacity 153

Absorption Costing Income Statement 166

Reconciliation of Variable Costing with Absorption Costing Income 167

Advantages of Variable Costing and the Contribution Approach 170

Enabling CVP Analysis 170Explaining Changes in Net Operating Income 170Supporting Decision Making 171

Adapting to the Theory of Constraints 171

Segmented Income Statements and the Contribution Approach 172

Traceable and Common Fixed Costs and the Segment Margin 172

Identifying Traceable Fixed Costs 173Traceable Costs Can Become Common Costs 173

Segmented Income Statements—An Example 174

Levels of Segmented Income Statements 174Segmented Income Statements and Decision Making 177

Segmented Income Statements—Common Mistakes 177

Omission of Costs 177Inappropriate Methods for Assigning Traceable Costs among Segments 178

Failure to Trace Costs Directly 178 Inappropriate Allocation Base 178

Arbitrarily Dividing Common Costs among Segments 178

Income Statements—An External Reporting Perspective 179

Companywide Income Statements 179Segmented Financial Information 179

Summary 180 Review Problem 1: Contrasting Variable and Absorption Costing 181

Review Problem 2: Segmented Income Statements 183 Glossary 184

Questions 184 Applying Excel 185 Exercises 186 Problems 192 Cases 200

C h a p t e r

Activity-Based Costing: A Tool to Aid Decision Making 203

Activity-Based Costing: An Overview 204

Nonmanufacturing Costs and Activity-Based Costing 204

Manufacturing Costs and Activity-Based Costing 205Cost Pools, Allocation Bases, and Activity-Based Costing 205

Designing an Activity-Based Costing (ABC) System 208

Steps for Implementing Activity-Based Costing: 210Step 1: Define Activities, Activity Cost Pools,

and Activity Measures 210

The Mechanics of Activity-Based Costing 211

Step 2: Assign Overhead Costs to Activity Cost Pools 211

Step 3: Calculate Activity Rates 213Step 4: Assign Overhead Costs to Cost Objects 216Step 5: Prepare Management Reports 218

8 7

Comparison of Traditional and ABC Product Costs 221

Product Margins Computed Using the Traditional Cost

System 221

The Differences between ABC and Traditional Product

Costs 222

Targeting Process Improvements 226

Activity-Based Costing and External Reports 227

The Limitations of Activity-Based Costing 227

Cost Concepts for Decision Making 259

Identifying Relevant Costs and Benefits 259

Different Costs for Different Purposes 260

An Example of Identifying Relevant Costs

and Benefits 260

Reconciling the Total and Differential Approaches 263

Why Isolate Relevant Costs? 265

Adding and Dropping Product Lines and Other

Segments 265

An Illustration of Cost Analysis 265

A Comparative Format 267

Beware of Allocated Fixed Costs 267

The Make or Buy Decision 269

Strategic Aspects of the Make or Buy Decision 269

An Example of Make or Buy 270

Opportunity Cost 272

Special Orders 272

Utilization of a Constrained Resource 273

Contribution Margin per Unit of the Constrained Resource 273

Managing Constraints 275The Problem of Multiple Constraints 277

Joint Product Costs and the Contribution Approach 278

The Pitfalls of Allocation 279Sell or Process Further Decisions 279

Activity-Based Costing and Relevant Costs 281

Summary 281 Review Problem: Relevant Costs 282 Glossary 283

Questions 283 Applying Excel 284 Exercises 285 Problems 293 Cases 301

C h a p t e r

Capital Budgeting Decisions 309

Capital Budgeting—Planning Investments 310

Typical Capital Budgeting Decisions 310 The Time Value of Money 310

Discounted Cash Flows—The Net Present Value Method 311

The Net Present Value Method Illustrated 311Emphasis on Cash Flows 312

Typical Cash Outflows 312 Typical Cash Inflows 312

Recovery of the Original Investment 313 Simplifying Assumptions 314

Choosing a Discount Rate 314

An Extended Example of the Net Present Value Method 315

Discounted Cash Flows—The Internal Rate of Return Method 317

The Internal Rate of Return Method Illustrated 317 Salvage Value and Other Cash Flows 318

Using the Internal Rate of Return 318 The Cost of Capital as a Screening Tool 318

10 9

Comparison of the Net Present Value and Internal Rate of Return Methods 318

Expanding the Net Present Value Method 319

The Total-Cost Approach 319 The Incremental-Cost Approach 321Least-Cost Decisions 321

Uncertain Cash Flows 323

An Example 323Real Options 324

Preference Decisions—The Ranking of Investment Projects 324

Internal Rate of Return Method 325Net Present Value Method 325

Other Approaches to Capital Budgeting Decisions 326

The Payback Method 326Evaluation of the Payback Method 327

An Extended Example of Payback 328Payback and Uneven Cash Flows 329 The Simple Rate of Return Method 330Criticisms of the Simple Rate of Return 331

Postaudit of Investment Projects 331

Summary 332 Review Problem: Comparison of Capital Budgeting Methods 332

Glossary 334 Questions 334 Applying Excel 335 Exercises 336 Problems 340 Cases 349

Appendix 8A: The Concept of Present Value 352 Appendix 8B: Present Value Tables 358

Appendix 8C: Income Taxes in Capital Budgeting Decisions 360

C h a p t e r

Profit Planning 368

The Basic Framework of Budgeting 369

Advantages of Budgeting 369Responsibility Accounting 370

Choosing a Budget Period 370The Self-Imposed Budget 371Human Factors in Budgeting 372The Budget Committee 373The Master Budget: An Overview 374

Preparing the Master Budget 375

The Sales Budget 376The Production Budget 377Inventory Purchases—Merchandising Company 379The Direct Materials Budget 379

The Direct Labor Budget 381The Manufacturing Overhead Budget 382The Ending Finished Goods Inventory Budget 383The Selling and Administrative Expense Budget 384The Cash Budget 385

The Budgeted Income Statement 389The Budgeted Balance Sheet 390

Summary 392 Review Problem: Budget Schedules 392 Glossary 394

Questions 395 Applying Excel 395 Exercises 397 Problems 403 Cases 414

Flexible Budget Variances 422

Activity Variances 422Revenue and Spending Variances 423

A Performance Report Combining Activity and Revenue and Spending Variances 425Performance Reports in Nonprofit Organizations 427Performance Reports in Cost Centers 427

12 11

Flexible Budgets with Multiple Cost Drivers 428

Some Common Errors 429

Standard Costs—Setting the Stage 452

Who Uses Standard Costs? 453

Setting Standard Costs 453

Setting Direct Materials Standards 454

Setting Direct Labor Standards 455

Setting Variable Manufacturing Overhead

Standards 455

Using Standards in Flexible Budgets 456

A General Model for Standard Cost Variance

Analysis 457

Using Standard Costs—Direct Materials

Variances 458

The Materials Quantity Variance 459

The Materials Price Variance 459

Materials Quantity Variance—A Closer Look 460

Materials Price Variance—A Closer Look 461

Isolation of Variances 462

Responsibility for the Variance 462

Using Standard Costs—Direct Labor Variances 462

Labor Efficiency Variance—A Closer Look 463

Labor Rate Variance—A Closer Look 464

Using Standard Costs—Variable Manufacturing

Evaluation of Controls Based on Standard Costs 471

Advantages of Standard Costs 471Potential Problems with the Use of Standard Costs 471

Summary 472 Review Problem: Standard Costs 473 Glossary 475

Questions 476 Applying Excel 476 Exercises 478 Problems 480 Case 486

Appendix 11A: Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System 486

Evaluating Investment Center Performance—Return

on Investment 501

The Return on Investment (ROI) Formula 501Net Operating Income and Operating Assets Defined 502Understanding ROI 502

Criticisms of ROI 505

Residual Income 505

Motivation and Residual Income 507Divisional Comparison and Residual Income 508

Operating Performance Measures 508

Delivery Cycle Time 508

Throughput (Manufacturing Cycle) Time 509Manufacturing Cycle Efficiency (MCE) 509

Balanced Scorecard 511

Common Characteristics of Balanced Scorecards 511

A Company’s Strategy and the Balanced Scorecard 513Tying Compensation to the Balanced Scorecard 516Advantages of Timely and Graphic Feedback 517

Summary 517 Review Problem: Return on Investment (ROI) and Residual Income 518

Glossary 518 Questions 519 Applying Excel 519 Exercises 520 Problems 526 Case 532

Appendix 12A: Transfer Pricing 533 Appendix 12B: Service Department Charges 546

A p p e n d i x

Pricing Products and Services 553

Introduction 554 The Economists’ Approach to Pricing 555

Elasticity of Demand 555The Profit-Maximizing Price 556

The Absorption Costing Approach to Cost-Plus Pricing 558

Setting a Target Selling Price Using the Absorption Costing Approach 558

Determining the Markup Percentage 559Problems with the Absorption Costing Approach 560

Target Costing 561

Reasons for Using Target Costing 562

An Example of Target Costing 562

Summary 563 Glossary 563 Questions 563 Exercises 564 Problems 565

A p p e n d i x

Profitability Analysis 569

Introduction 570 Absolute Profitability 570 Relative Profitability 571 Volume Trade-Off Decisions 574 Managerial Implications 576

Summary 577 Glossary 578 Questions 578 Exercises 578 Problems 579 Case 582

Photo Credits 583

B

“Creating value through values”

is the credo of today’s ment accountant It means that man agement accountants should maintain an unwavering commit- ment to ethi cal values while using their knowledge and skills to influ- ence decisions that create value for organizational stakeholders

manage-These skills include managing risks and implementing strategy through planning, budgeting and forecasting, and decision sup- port Management accountants are strategic business partners who understand the financial and operational sides of the business

They not only report and analyze financial measures, but also nonfinancial measures of process performance and corporate social performance Think of these responsibilities as profits (financial statements), pro- cess (customer focus and satisfaction), people (employee learning and satisfaction), and planet (environmental stewardship) ■

Source: Conversation with Jeff Thomson, president and CEO of the Institute of Management Accountants

T his chapter explains why managerial accounting is important to the

future careers of all business students It begins by answering three questions:

(1) What is managerial accounting? (2) Why does managerial accounting ter to your career? and (3) What skills do managers need to succeed? It con-cludes by discussing two topics important to all managers—the role of ethics in business and corporate social responsibility

mat-What Is Managerial Accounting?

Many students enrolled in this course will have recently completed an introductory financial

accounting course Financial accounting is concerned with reporting financial

infor-mation to external parties, such as stockholders, creditors, and regulators Managerial

accounting is concerned with providing information to managers for use within the

organization Exhibit  1–1 summarizes seven key differences between financial and managerial accounting It recognizes that the fundamental difference between finan-cial and managerial accounting is that financial accounting serves the needs of those

E X H I B I T 1–1

Comparison of Financial

and Managerial Accounting

• Reports to managers inside the organization for:

Planning Controlling Decision making

• Emphasizes decisions affecting the future.

• Emphasizes relevance.

• Emphasizes timeliness

• Emphasizes segment reports.

• Need not follow GAAP/IFRS.

• Not mandatory.

Accounting

Financial and Operational Data

Managerial Accounting

• Reports to those outside the organization:

Owners Creditors Tax authorities Regulators

• Emphasizes financial consequences of past activities.

• Emphasizes objectivity and verifiability.

• Emphasizes precision.

• Emphasizes companywide reports.

• Must follow GAAP/IFRS.

• Mandatory for external reports.

Financial Accounting

• Recording

• Estimating

• Organizing

• Summarizing

outside the organization, whereas managerial accounting serves the needs of ers employed inside the organization Because of this fundamental difference in users,

manag-financial accounting emphasizes the manag-financial consequences of past activities, tivity and verifiability, preci sion, and companywide performance, whereas managerial

objec-accounting emphasizes decisions affecting the future, relevance, timeliness, and segment

performance A segment is a part or activity of an organization about which managers

would like cost, revenue, or profit data Examples of business segments include product lines, customer groups (segmented by age, ethnicity, gender, volume of purchases, etc.), geographic territories, divisions, plants, and departments Finally, financial accounting

is mandatory for external reports and it needs to comply with rules, such as generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), whereas managerial accounting is not mandatory and it does not need to comply with externally imposed rules

As mentioned in Exhibit 1–1 , managerial accounting helps managers perform three

vital activities— planning, controlling, and decision making Planning involves

establish-ing goals and specifyestablish-ing how to achieve them Controllestablish-ing involves gatherestablish-ing feedback

to ensure that the plan is being properly executed or modified as circumstances change

Decision making involves selecting a course of action from competing alternatives Now

let’s take a closer look at these three pillars of managerial accounting

Planning

Assume that you work for Procter & Gamble (P&G) and that you are in charge of the company’s campus recruiting for all undergraduate business majors In this exam-ple, your planning process would begin by establishing a goal such as: our goal is

to recruit the “best and brightest” college graduates The next stage of the planning process would require specifying how to achieve this goal by answering numerous questions such as:

• How many students do we need to hire in total and from each major?

• What schools do we plan to include in our recruiting efforts?

• Which of our employees will be involved in each school’s recruiting activities?

• When will we conduct our interviews?

• How will we compare students to one another to decide who will be extended job offers?

• What salary will we offer our new hires? Will the salaries differ by major?

• How much money can we spend on our recruiting efforts?

As you can see, there are many questions that need to be answered as part of the

planning process Plans are often accompanied by a budget A budget is a detailed

plan for the future that is usually expressed in formal quantitative terms As the head

of recruiting at P&G, your budget would include two key components First, you would have to work with other senior managers inside the company to establish a bud-geted amount of total salaries that can be offered to all new hires Second, you would have to create a budget that quantifies how much you intend to spend on your campus recruiting activities

Controlling

Once you established and started implementing P&G’s recruiting plan, you would sition to the control process This process would involve gathering, evaluating, and responding to feedback to ensure that this year’s recruiting process meets expectations

tran-It would also include evaluating the feedback in search of ways to run a more effective recruiting campaign next year The control process would involve answering questions such as:

• Did we succeed in hiring the planned number of students within each major and at each school?

• Did we lose too many exceptional candidates to competitors?